Banks on reform drive get autonomy gift from Modi

Banking sector top brass discuss reforms at Pune retreat

shishir

Shishir Tripathi | January 5, 2015 | New Delhi




India’s public sector banks have received more than they sought to get at the Pune retreat. Prime minister Narendra Modi declared complete autonomy for PSBs and opened doors for reforms. Over 100 bankers had gathered at Pune to discuss and deliberate reforms. Modi’s autonomy announcement is the first step in the direction of reforms.

Now, the banks can roll out new generation banking practices and bring in a reformed and robust banking sector, without looking over the shoulder for orders or directions from the political masters.

The prime minister said that the banks should be run professionally and that there would be no interference. But accountability was essential. He said the government had no vested interest, and public sector banks can derive strength from this fact.

With all major stakeholders and top most decision maker including the prime minister, finance minister , RBI chief and heads of all PSBs coming together, for the first time to deliberate upon the urgent reforms needed in banking sector, bankers retreat held at Pune concluded as a serious effort to find time-bound and real solutions.

If ensuring autonomy was one of the most applauded achievements of the retreat then bringing all the banks together was not a mean feat either. Prime minister called for developing common strengths among the 27 public sector banks. He suggested this could be done in areas such as software, and advertising. Citing the example of number portability in the telecom sector in this regard PM said this would improve the customer-centric focus of banks and adding that  public sector banks, as a team, should also be conscious of the direction in which the country is moving, and work towards simplifying procedures to facilitate the common man.

Prime minister must have surely meant much more than just connectivity. Consider this: Non performing assets and bad loans have been a major concern for the banks over the years. A common network of the banks would keep tab on defaulters and fraudsters cheating different banks.

The PSBs too came up with certain recommendations that were duly registered by the government. One among them was to implement the recommendations of P J Nayak Committee set up to review the governance of the board of banks.

The committee has recommended government to distances itself from several bank governance functions. For this purpose it recommends that the bank nationalisation Acts of 1970 and 1980, together with the SBI Act and the SB(Subsidiary Banks)Act, be repealed, all banks be incorporated under the Companies Act, and a Bank Investment Company (BIC) be constituted to which the Government transfers its holdings in banks.

 
The Government's powers should also be transferred to BIC. It also suggested that the process of board appointments needs to be professionalised and a three phase process is envisaged.

If prime minister ensured that banks would be run professionally and there would be no interference his chief economic advisor Arvind Subramanian advised categorizations of the public sector banks|(PSBs) into weak, good and strong categories and accordingly consolidation and restructuring measures to  be applied to them. Subramanian said that there should be better bankruptcy procedures.

While remarkable efforts have been made over the years to put in place a sound banking system, financial literacy still remains a big challenge. Acknowledging the problem prime minister called upon banks to take the lead in encouraging competitions on financial literacy in schools, much like mock Parliament competitions.

Some of the constructive ideas were also initiated like “developing common strengths among all the PSBs along with the role the banks has to play in fulfilling other social objectives like that of providing affordable housing to people.

As stated in the agenda of the retreat finance minister also tried to address the concern that majority of the accounts opened under pradhan mantri jan dhan yojna (PMJDY) have zero balance and might turn dormant. FM assured that most of the inactive accounts will become operational with the introduction of direct benefit transfer (DBT) and asserted that these account holders will become symbol of the identity of the cashless system.

Consolidation of the banks is yet another area that was debated upon. However, the government is learnt to have categorically stated that any such proposals should come from banks.

RBI governor Raghuram Rajan stated that banks need to channelize the full savings of the households into the financial system so that requisite financial resources for growth could be made available. He also stated that there is a need for internationalisation of the banking system in the current global environment. In the short term (from 0 to 12 months) he said that there was need to clean up the NPAs and then restructure other stressed loans so as to put the economy back on the track.

He also took up some important issue like need for enhancing the capital base of the PSBs and  need for consolidation in ownership, improvement in governance, and enhancement of management capability. He stated that with the licensing of the small banks and the payment banks there would be new players in the industry.

Another important issue of campus recruitment was also discussed. Rajan said that the PSBs need to recruit young talent, train, and retain them and that the government needs to have a re-look at the campus recruitment which at present is banned because of Supreme Court ruling.

7 point reform agenda for the government
 

  • Adopt Nayak committee report. Establish Bank Board Bureau comprising professionals and eminent bankers to appoint and empower individual bank boards.  Set up Bank Investment Committee. Transfer government investment in banks to BIC. Reduce government ownership to less than 51 percent.
  • Fully empower banks on HR decisions – recruitment, consequence management and compensation
     
  • Create an environment to protect right decisions and minimize interference: Minimize        CVC/CAG/CBI/RTI related issues.
     
  • Strengthen and ensure implementation of legal framework. 
  • Strengthen and simplify processes for credit insurance. 
  • Eliminate market distortions: debt waivers, interest rate caps (agriculture  loans  less than Rs 3 lakh).
  • Enabling infrastructure for Digital Banking under Digital India.

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